Part 1 of 2
The banks run the place… they give three times more money than the next biggest group,” says Congressman Collin Peterson, the Chairman of the Agriculture Committee. Peterson, who says banks are controlling Congress, recently introduced an ill fated bill to bar Derivatives trading in any clearinghouse regulated by the New York Federal Reserve, and thereby bring Derivatives trading out of the shadows of the private clearing houses, and onto public exchanges.
You see, it finally took someone who knows about agriculture, to get down to the nitty-gritty of the Derivatives dilemma. The trouble is that a bill like Congressman Peterson’s cannot pass unless it is materially changed to the satisfaction of his colleagues in Congress, you know, the ones who are accepting the contributions and perks from their bankster masters.
Derivatives, along with their cousins the Collateralized Debt Obligations (CDO’s), and Credit Default Swaps (CDS) a type of derivative in itself, are the financial instruments that have in recent times been defined as a bottomless pit of incomprehensibly written economic jargon, or Wall Street hocus pocus. They are being blamed by many bankers, politicians and high government officials, to be the underlying cause of AIG’s recent quarterly loss, over 67 billion dollars, and the ongoing world financial crisis, among a few other things.
Specific people are not being held accountable mind you, just Derivatives, Collateralized Debt Obligations, Credit Default Swaps and a misleading device called a Repo Transaction. This is almost like saying that Hitler didn’t make any mistakes, it was merely National Socialism… and since I mentioned National Socialism… well, never mind that, for the time being
HOW BANK OF AMERICA AND THE OTHER LARGE CENTRAL BANKS CAUSED THE LARGEST ECONOMIC COLLAPSE IN THE HISTORY OF THE WORLD
Here’s what really happened... up until about 2007, Wall Street and their international counterparties got away with running what amounted to a colossal pyramid scheme. They started by designing high yielding mortgage terms to bring the highest price from investors, and created millions of hypothetical CDO’s (mostly mortgage obligations that had not yet been accepted and funded), that were to be bundled together according to risk, into tranches within larger entities called Structured Investment Vehicles, or Special Purpose Entities. Next, they sold these empty Investment Vehicles stated to bring the highest yield, to the world’s banks, trusts, institutions, and municipal, corporate or government entities, and other large investors.
As the money rolled in from the investors, the aggregators of the Special Purpose Entities sent the requirements of the mortgage terms to American banks such as Bank of America, Merrill Lynch and Countrywide that steered borrowers into those terms. Thereafter, those loans were funded from the SPV’s and SPE's to the banks, and then on to the consumers who had unknowingly applied for the loans. At that point, the Special Purpose Vehicles were populated with real obligations instead of the imaginary ones created to sell the SPV’s in the first place. In other words, American borrowers who went to a bank shopping for a loan never knew that they really had no choice, and their mortgage had been created and sold by an SPV to an undisclosed investor, long before they ever applied for it.
In order to sell these SPV’s to municipalities and other state entities that are regulated to keep their portfolios conservatively safe, many of those hypothetical pools of mortgages that had not yet been made needed insurance to raise the risk to an acceptable level. So the banks purchased insurance on the mortgages that did not yet exist, with insurance that did not really exist because the insurance companies, such as AIG, insured the performance of far more mortgage loans than they actually had the reserves to insure.
As a measure to further conceal risk, and facilitate more trades, the banks utilized a device called the Credit Default Swap (CDS), another method of insurance under which for a monthly premium, another institution, bank, or insurance corporation such as AIG, would agree to pay off the debt if the borrowers defaulted. The Federal Reserve and the Office of the Comptroller of the Currency thought it was such a great idea, that they exempted banks from having to keep cash reserves for the Credit Default Swap protected obligations the banks held. This allowed the banks to make more loans with the amount of their cash reserves that previously, under federal law, would have been required to remain in the banks to balance their loan to reserve ratios. The fact that the secretive Federal Reserve led the way in allowing the banks to do such a thing, was no real surprise because the Chairman of the Federal Reserve has always been appointed by the President of the United States from a list of three people supplied by guess who… the banks.
To make the hypothetical mortgage loan pools within the SPV's more attractive to investors worldwide, they were mixed within supposedly more stable instruments called Collateralized Debt Obligations (CDO’s) that contained several kinds of debt such as corporate or credit card debt. The theory behind the structuring was that diversification of different kinds of debt within the CDO’s would diminish the overall risk of default. Finally, in order to conceal the high risk nature of these SPV’s of CDO’s that did not yet exist, from investors like governments or pension funds that were prohibited from making risky investments, our largest American banks such as Bank of America, Merrill Lynch and Countrywide who just happened to own the rating agencies, and apparently our government as well, paid their rating agencies to rubber stamp the imaginary mortgages Triple A (AAA) or Double A (AA).
As the creators of SPV’s and SPE’s endeavored to create the most attractive terms and yields to entice investors worldwide, the terms of the underlying mortgage obligations forced upon American homeowners became ever more egregious. It was common practice, for the banks to pay high cash incentives to loan officers and brokers, as a reward for steering borrowers into more profitable sub-prime (predatory) loans, when the borrowers were actually qualified for better terms. In other cases, No Documentation- No Asset Verification Loans, or “liar’s loans” were pushed to undocumented or unqualified borrowers.
Many of those aggressive mortgage documents were written in such a way that the interest payment would often double or triple within a few years, often enslaving the borrowers within an astoundingly unethical debt- to-income ratio of 80% or even more. In other words, the rate of interest, and hence the rate of return, promised on most of the mortgage paper that was funded through the banks from the SPV’s and SPE’s, was deliberately unsustainable, and the sole purpose of rewarding banks and their loan officers for steering borrowers into these loans with predatory terms, was to comply with the with the pre-written high yield terms of the SPV’s and SPE’s that had already been created and sold to feed the international pyramid machine.
The only people that appeared to worry when an alarming number of mortgages comprising the fraudulently rated Collateralized Debt Obligations began to default, and when investors in the international Secondary Market began to invoke their buy-back clauses and refused to purchase any more American mortgage securities, were not the government regulators whose job it was supposed to be, but instead only the shareholders in those Wall Street Firms. Those pesky shareholders were concerned about how badly their firms were getting hit by the deterioration of the market. No worries for the Wall Street Banksters however; they merely shorted the SPV's and SPE's they had sold to investors worldwide, and then protected themselves with another device called a Repo Transaction.
The Repo Transaction worked like this. If their firm was seriously upside down when it came time to report to shareholders, they merely borrowed whatever amount of money they needed from another Wall Street firm, and in the process transferred as much of their toxic debt as they needed to that same firm, with the agreement that they would pay back the money and take back the toxic debt within a month or so, after their reporting. Then, the transaction was fraudulently recorded on their books as a sale, instead of what it really was, a loan. The whole purpose of the transaction was to give the misleading appearance that they were still solvent.
One can imagine that if the stalwart Wall Street individuals who structured this debacle were really sharp, they would have at least thought of a way around the annoying buy-back clauses in their contracts. But you see, since the Derivatives, CDO's and CDS did not work logically, the banksters were busy trying to figure out how to make them work mathematically. Not even past chairman of the Federal Reserve Alan Greenspan, nor present chairman Ben Bernanke, nor former Goldman Sachs CEO and Secretary of the Treasury Henry M. Paulson Jr., nor former head of the New York Federal Reserve and current Secretary of the Treasury Timothy F. Geithner, or anybody else for that matter, could accurately figure out how this scheme of Derivatives, Collateralized Debt Obligations (CDO’s) and Credit Default Swaps (CDS), was ever going to sustain itself, because the language and the formulas in the instruments was incomprehensible, and there wasn’t nearly enough money in reserve to insure potential losses.
One of the fundamental problems with the whole scheme was that the insurance institutions providing the Credit Default Swap protection were not even required by government regulators to prove that they had enough reserves to actually pay off the debts in the event that, God forbid, defaults occurred and world’s investors, financial institutions, real estate trusts, worldwide municipal and government entities that purchased the SPV’s and SPE’s, started to suffer losses and demanded that Wall Street buy back the bogus “Triple A” rated paper. That is why Secretary of the Treasury Paulson had to pull a fast one, and extort billions in TARP money from Congress on the pretext of buying “toxic loans” from the books of the banks, because Congress would have never approved it if he had told them the money was actually going to pay off investors around the world so they would not sue American banks for the losses on SPV’s and SPE’s they purchased, and thereby put all of Wall Street in receivership.
To that extent Paulson had the right idea. It is just that the payments to investors around the world, who were defrauded by American banks, shouldn’t have been made on the basis of keeping them quiet, or in the interest of rewarding some investors and bankrupting others for the benefit of private firms like Goldman Sachs for instance. Our government should have used its financial resources to stand behind all the bogus Triple A rated SPV’s and SPE’s that our American banks used to defraud investors of the nations of the world. After all, our government had been responsible for monitoring the banks, and that way, we would have instilled confidence, and preserved the Secondary Market. But instead, based upon poor choices influenced by panic, political corruption and greed, they blew it.
The sad news, is the little known fact that the Seconday Market, a concept created by the Roosevelt Administration and later perfected by the Eisenhower Administration, was the main engine responsible for the American boom years between 1950 and 2007, and now Wall Street has broken it. Further, less than half of the underlying time bomb mortgages in the United States have yet to adjust dramatically upward and fall into default, and due to the so-called “credit crunch”, many borrowers who thought they would be able to convert to more reasonable loan terms, have been forced to continue to make unreasonably high interest payments compared to their income, draining all of their savings reserve and retirement accounts. Meanwhile, our government and their masters at the banks, in spite of their rhetoric to the contrary, continue to cover up what really happened to the world economy. It is almost impossible for borrowers to find out who actually owns their mortgages, have their loan terms modified, or ascertain whether it is the real intention of the undisclosed investors to simply be paid off by their insurance and the U.S. government, as well as conduct the most colossal foreclosure operation in history.
It is almost inconceivable to think, that our American government would allow institutions with trustworthy names like America’s Wholesale Lender, and Bank of America, to pull off the most unethical real estate heist since government cronies purchased thousands of acres of confiscated land for a fraction of its value, after the rightful Japanese American owners had been shipped off to "relocation” camps.
Whether you believe the financial lobby position that the "brush" of defaulted homeowners needs to be swept away for the economy to recover, or you believe that unless restrained, the foreclosure cisis will go on unabated for years due to the bank's shadow inventory of payment shock loans, one thing is certain; both ideologies need to go through the door to economic recovery at the same time, or else nobody goes. Call the U.S. Treasury Department comment line and voice your opinion at 202-622-2970, press #1 to leave a message. You'll be able to speak to a live operator if you call the White House comment line at 202-456-1111. They really do need to hear from you.
Comments